The Impact of Product-Dependent Policyholder Risk Sensitivities in Life Insurance: Insights from Experiments and Model-Based Simulation Analyses

Abstract

Abstract In contrast to previous work, this paper studies the product-dependent risk sensitivities of policyholders toward the reported safety levels of a life insurer in a long-term multi-period setting. With this aim, we first conduct two choice-based conjoint analyses using a German survey panel to investigate the effect of an insurer’s reported default probability on individuals’ willingness to pay for annuities and term life insurances. Our experimental results suggest that individuals (sharply) reduce their willingness to pay for probabilistic life insurance products, with (strong) product-specific differences. In light of these observations, the paper then revisits the impact of these differing risk sensitivities on a life insurer’s risk situation in a simulation study based on an asset-liability model with a specific focus on a life insurer offering annuities and term life insurances. The results reveal the potentially strong impact of such product-dependent risk sensitivities on risk-reducing portfolio compositions. One main driver is the deviation between risk sensitivities depending on the respective product (annuities vs. term life).